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I'm obviously in a camp that doesn't think the standard economic theory is completely correct. And before you dismiss that, my camp includes plenty of Ph.D.s that studied standard economics and then came to the MMT camp, plus those Ph.D.s that started out there. So it has some validity.
That said, your explanations might as well be written in German for all the help they are to a layman. You need to dumb it way down on this forum.
Right now in Jackson Hole, Krugman and Summers are coming to some very MMT-like conclusions, but without acknowledging MMT itself or any of the MMT academics that have been saying the same things, and publishing papers, for years. They are bending into pretzels trying to validate Krugman's IS/LM ideas, instead of simply questioning whether it's valid at all. Mostly, I believe, because they have too much to lose by admitting that they have been wrong for years.
This is not true either. These are accounting identities, not expenditures as the FRED article notes. Furthermore, there is a stock of savings that can (and is) drawn upon to make purchases.
Economic growth is more than deficit spending, which is what you're trying to make the case for throughout these exchanges... i.e. that the Treasury should forego issuing bonds and just print their expenditures on demand. I for one oppose this type of system, because it incorrectly assumes that government is the driver of innovation and growth.
Again, you're improperly understanding what the NIPA identities are telling you. Output is consumed on the basis of production, not income.
People can go into debt,
Same applies with government.
pull from savings,
substitute, etc... in order to meet their consumption and investment goals in the absence of the necessary income.
No it does not! I cannot understand why you're refusing to acknowledge this simple point: imports do not reduce GDP.
Repeat after me... imports do not reduce GDP.
You misunderstand what I am saying. I am saying that economic growth requires an increase in aggregate demand year over year, and that requires in increase in income year over year, which requires some combination of increased credit and/or deficit spending. Because the money has to come first. Any real-world increase in production is going to require more labor and more materials, and nobody works, or gives you materials, for free.
First of all, nobody wants money. They want what money buys.
Second of all, it's not because you increase the supply of money that people can suddenly magically produce more. More money doesn't make anyone more productive by even one iota. You just have exactly the same real situations with the same real constraints, except with more money. The only force countering an immediate increase in price is the presence of sticky prices and that fades over time. The best argument you will have is that in a draught, handing out money in a system with pricing that takes time to update itself might lead the economy to push closer to its potential, but that is not an infinitely lived situation.
Third of all, deficit spending cannot be an eternal constant either. At some point, that debt needs to be paid back, so there absolutely is a level -- perhaps a very high level, but some level nonetheless -- beyond which it is no longer possible to sustain that scheme.
But they do get paid in money. And at some level, people do want money more than what it can buy; savings are proof of that.
Ford isn't constrained by the lack of available labor, or the lack of parts. Ford produces as many cars as they forecast they can sell. They are only constrained by demand. At least, on realistic points on the curve. I'm not claiming that they can make an infinite number of cars. But they can certainly produce more than they do now, if the demand was there.
The government has no operational need to extinguish its liabilities. If there is a limit on the number of govt. liabilities that can exist as savings in a healthy economy, and you think something bad would happen at that level, I'm willing to listen.
Not in an aggregate sense. You may draw $5 out of your savings and spend it, but somebody else is putting away $6.
I am saying that economic growth requires an increase in aggregate demand year over year, and that requires in increase in income year over year, which requires some combination of increased credit and/or deficit spending. Because the money has to come first. Any real-world increase in production is going to require more labor and more materials, and nobody works, or gives you materials, for free.
That sounds like a "money is neutral" position.
But in the aggregate, they don't.
Not in the year that you are measuring, maybe. But over time, I stand by my reasoning.
What does reduce GDP in times of recession?
Reduced demand for domestic production, for whatever reason.
You would get the same demand-lowering effect if everybody decided to save 20% of their income. And trade deficits are just savings by foreign parties - Chinese workers earn dollars, then don't spend them.
I'll just use data to make my point... can you do the same?
Government deficits are not the pinnacle source of aggregate demand. What is most desirable is for the private sector to drive AD, and when market failure curtails growth, government steps in to bridge the gap.
Your graph is of the % change from the previous year, so of course it's going to go up, down, and negative.
Savings is consumption tomorrow. Money is just one type of good against which we chose to measure all others.
This might surprise you, but the New Keynesian models I talked about earlier imposes 3 constraints on businesses: technology, demand and some kind of pricing rigidity. Yet, if you try to match the statistical patterns in the data with this kind of model, you find that innovations to overall productivity are a major driver of business cycle fluctuations. Often, innovations to productivity and to the marginal efficiency of investment (how easy it is to transform savings into productive capital) are the only two drivers of long term economic growth, besides population growth. All of this in spite of the fact that changes in deficit and credit conditions are often present in those models.
The reason is as follows: in the long run, the economy is pressing against the production possibility curve. Why? Because businesses are thought to, at least to a first approximation, to do their best. So, once the effect of nominal rigidity has faded, you need the ability of the economy to produce more of everything to increase, or else, all consumers can do is change the point they pick along the same curve. That's the theoretical reasoning -- which I doubt you will buy in any event.
However, irrespective of this, you have quite a big empirical problem....
...The point is that your claim would work only temporarily in very specific circumstances if those models are right and these models do offer and obvious way to rationalize the fact you have high real growth in the 1950s with somewhat balanced budgets and low real growth rates today with rather proportionally large deficits.
Money is more than just another commodity. We can't just immediately come up with more apples if there is a jump in demand, but we can come up with more money on the spot.
Savings might mean consumption tomorrow for an individual, but in the aggregate, we always net save. So savings today really just means lost consumption for today that won't be made up in the future.
What this sounds like to me is that you look at a graph of deficit spending vs. growth, notice that deficit spending seems to go up as economies slow down, therefore you are assuming deficit spending to be the cause of the slow growth.
I would counter by saying that a depressed economy means lower tax revenues, which, combined with fairly steady government spending, gives you increased deficits (and debt).
I would also counter that your models would suggest that austerity is the best way out of a recession, but that didn't work for Europe.
And finally, I would counter that you can't just look at the years that fit your theory well to prove your point. The Depression counts, and WWII counts. Did deficit spending cause the Depression, or was it a cascade of failing private debt? And did we get out of the recession when the government stopped diverting resources away from the private sector, or did we get out of it when we finally stopped waiting for the private sector to "come around" and increase investment in the face of a still-depressed economy?
You missed part of what I said. Of course, you always have net savings. Investment derives from savings in the aggregate.
I'm not understanding what you're trying to say.
You missed part of what I said. Of course, you always have net savings. Investment derives from savings in the aggregate.
It begins with what’s called “the paradox of thrift” in the economics textbooks, which goes something like this: In our economy, spending must equal all income, including profits, for the output of the economy to get sold. (Think about that for a moment to make sure you’ve got it before moving on.) If anyone attempts to save by spending less than his income, at least one other person must make up for that by spending more than his own income, or else the output of the economy won’t get sold.
Unsold output means excess inventories, and the low sales means production and employment cuts, and thus less total income. And that shortfall of income is equal to the amount not spent by the person trying to save. Think of it as the person who’s trying to save (by not spending his income) losing his job, and then not getting any income, because his employer can’t sell all the output.
So the paradox is, “decisions to save by not spending income result in less income and no new net savings.” Likewise, decisions to spend more than one’s income by going into debt cause incomes to rise and can drive real investment and savings. Consider this extreme example to make the point. Suppose everyone ordered a new pluggable hybrid car from our domestic auto industry. Because the industry can’t currently produce that many cars, they would hire us, and borrow to pay us to first build the new factories to meet the new demand. That means we’d all be working on new plants and equipment - capital goods - and getting paid. But there would not yet be anything to buy, so we would necessarily be “saving” our money for the day the new cars roll off the new assembly lines. The decision to spend on new cars in this case results in less spending and more savings. And funds spent on the production of the capital goods, which constitute real investment, leads to an equal amount of savings.
I like to say it this way: “Savings is the accounting record of investment.”
Consider the possibility that you have it backward.
I'm working my way through Wiki's Macroeconomics wiki book right now, but I'm having a hard time taking it seriously. But I'm trying.
This is something I have always wanted to understand. To me, a sensible definition of savings is money that I don't use to consume or invest. How do you get real Investment from my savings? What is the real-life mechanism?
Government deficits are not the pinnacle source of aggregate demand. What is most desirable is for the private sector to drive AD, and when market failure curtails growth, the government steps in to bridge the gap.
JohnfrmClevelan, if our GDP would be $15 trillion, and a trade deficit of $500 billion = $0.5 trillion, our nation would have spent $15.5 trillion and produced $15 trillion.Circular flow of income - Wikipedia
GDP = C (consumption) + I (investment) + G (government spending) + (X - M) (net exports, positive or negative)
Production = national income = potential demand.
If you have a $15 trillion economy, the national income is $15 trillion. ...
You can print more money. The point is that this eventually will turn up as increased prices because what matters, in the long run, is the capacity to bring things to the market.
You missed part of what I said. Of course, you always have net savings. Investment derives from savings in the aggregate.
No, I said that you have to come up with a good reason for what we see. The implied correlation above has the wrong sign given your view that deficits tend to drive economic growth.
Usually, we set aside the period prior to 1947 for lack of quarterly data, but it is true that we would ideally prefer to take the whole data. It wouldn't look better for you, however, because if you all the way back to the 19th century, we do have old estimates that we can use at a yearly frequency, I believe, for the US and possibly also for England. Average growth rates were quite high until the Depression and things did fall back in place when the US entered WWII. Until the 1960s, you wouldn't have heavy government budgets outside of wartime, hence the point remains: the correlation would be negative.
For every given value of of a nation's spending, trade surplus nations' increased, and trade deficit nations' reduced their nation's GDP. USA's chronic annual trade deficits indicate we purchased a greater value of products than we produced. Due to those annual trade deficits, our nation's numbers of jobs and aggregate payroll amounts were then less than otherwise.
For the nth time... this is undeniably false. This fallacy is addressed in this very thread.
So please explain to me (using examples if possible), how when a US dollar that is captured by foreign interest and deposited in a bank (yes US dollars never leave the US, but they are still saved) does not reduce demand and by extension GDP unless the government or private sector borrow dollars to replace them.
Creating money by policy causes inflation, right. I mean, we have an inflation target. This, in turn, does increase prices, that's also true, but what you're leaving out is that salaries are cost and therefore will increase over time. Thus, price increases only matter (at the 10,000-foot view) in relation to the cost of work. If the cost of work (salaries) increases at the same or faster rate than prices, that is, IMO, a good thing. And indeed the cost of wages have, over the last 100 years or so increases 5 times faster than prices.
Investment funds savings, it is not derived from it.
First of all, I am not leaving out wages. I meant that all prices would increase more rapidly over time.
Second of all, this is absolutely not a good thing.
Inflation is costly, especially because of nominal wage rigidities. The idea is that wages in the labor market do not adjust immediately when changes occur. Only some wages get adjusted immediately; others will have to wait.
When you have a higher average inflation rate, the adjustments are bigger when they are made which in turn means that at any given point in time the dispersion of prices is bigger. That worsening price dispersion is the cost of inflation. It is costly because it messes up relative prices across inputs, as well as across labor types: when those relative prices do not reflect real costs and real preferences, they lead to inefficient outcomes.
We used to think that those costs were small and mostly related to increased dispersion in the prices of the goods market. It's why people like Krugman were talking about raising the inflation target to 4%, for example. It turns out, however, that if you work through the maddeningly complicated algebra without making a certain simplifying assumption, the resulting costs are much larger than we thought and are mostly related to sticky wages. In other words, to the best of our knowledge, you're wrong. Higher inflation rates lead to distortion because of sticky wages that happen to be very costly.
That is just the wording I choose. Investment equals savings is an accounting identity in macroeconomic models.
Imported goods are consumed or used for investment (durable goods).
All the NIPA equation does with imports is subtract them from domestic production to yield a net-zero. Hence, imports are not a detriment to domestic production, because the transaction is mutually beneficial.
Instead of investing in the manufacturing of textiles and non-durable die casting, U.S. producers can focus on higher-level goods like cloud infrastructure, weapons systems, and electrical generation equipment.
Furthermore, trade also creates an income effect. Instead of paying prices for products whose production is originated in an area with a higher standard of living (higher labor/property/input costs), people and businesses can consume these goods and have additional income left for consumption/investment.
You do realize that consumption or investment due to foreign-produced goods/services are still economic activity? Trade deficits allow the country to consume above its productive capacity.
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